Market Report: Persimmon surges on hopes of recovery

Housing stocks rallied strongly last night, with Persimmon rising by more than 11 per cent as hopes of recovery took hold.

Buyers piled in after Cazenove said that current valuations were not only out of touch with the sector's leading indicators, but also at odds with recent commentary from the housebuilders themselves. Indeed, despite evidence of stabilising house prices, increasing mortgage applications and approvals, the sector has underperformed the FTSE 100 in the current quarter.

The broker explained that while levels of house sales remained depressed, they would eventually turn the corner because the current state of affairs was "unsustainable". "Demographics alone suggest we need more houses [and] housebuilders will be significant beneficiaries of this need," said Cazenove. "We would encourage investors to hold their nerve and look afresh at the value opportunities in the sector."

It named Persimmon as one of its top picks in the housing sector, citing the current valuation, which in its view did not reflect the strengths of the group's land bank and management team. Persimmon's shares duly closed 45.8p higher at 459.4p,

Cazenove suggested that the market was also overlooking Berkeley, which stands to benefit as London's property market and financial services industries recover, and Taylor Wimpey, which was trading at a significant discount to net asset values. The note helped Berkeley to rise by 28p to 897p and Taylor Wimpey by 2.07p to 37.57p.

Cazenove's remarks also boosted Redrow, which rose 3.9p to 138.9p. "In our view, Redrow has yet to re-rate appropriately following the return of Steve Morgan and the refocusing of the group on traditional family homes," the broker said, referring to the return of the company's founder earlier this year.

Overall, the FTSE 100 index finally managed to shake off the impact of Dubai's debt woes, rising by 121.49 points, or 2.3 per cent, to 5,312.17. The FTSE 250 was also strong, rallying by 2.4 per cent or 216.67 points to 9,135.11.

As so often happens on the FTSE 100, the gains were down in the mining sector, which rallied as the US dollar slid again. Sentiment was also boosted by positive data about Chinese manufacturing. The leading stocks tracked rising metals prices, with Fresnillo bouncing up 63p to 906p, and Xstrata gaining 67p to close at 1136p.

The Eurasian Natural Resources Corporation, up 37.5p at 899p, was helped on its way by Bank of America-Merrill Lynch, which added the stock to its widely-followed Europe 1 list of preferred shares. Other risers were Lonmin, which closed up 76p at 1851p, Vedanta Resources, which was 82p higher at 2386p, and BHP Billiton, which rose by 65.5p to 1923p.

Banks rebounded after analysts at Fitch said Dubai World's problems alone were unlikely to affect the rating of any London-listed lender. HSBC and Standard Chartered, the banks most exposed to a broader economic or market fallout in the Gulf, were strong enough to withstand the current turmoil, the agency added, soothing nerves across the sector.

At the close, Standard Chartered was the strongest of the lot, rising 77p to 1561p. HSBC rose by 19p to 726p, Barclays was 3.7p ahead at 296.05p and Royal Bank of Scotland gained 1.085p to 34.265p. Lloyds lagged behind, easing back 1.01p to 54.14p, with traders attributing the weakness to technical reasons. Its target price was reduced from 105p to 65p at KBW.

Elsewhere, Morgan Stanley supported sentiment around the commercial property group Hammerson, which added 19p to 419.7p after the broker started coverage with an "overweight" stance. "We think the market under appreciates its UK development prospects which, if London rents recover in 2010, will return to focus and should restore a premium valuation to the shares," Morgan Stanley said. It also pointed out that Hammerson was trading at an 8 per cent premium to its last reported net asset value, compared to more than 20 per cent for its sector peers Land Securities, which closed 18.5p higher at 677p, and British Land, which was up 15.2p at 460.6p.

Further afield, the defence technology group Qinetiq came under pressure amid round of profit-taking and fell by 2.9p to 154.2p after Investec scaled back its target price for the stock from 170p to 160p.

"[The company's first-half] results were in line but current trends highlighted that some elements of the Qinetiq portfolio are more susceptible to defence budget pressures than the market had previously thought," the broker said, sticking to its "hold" stance on the stock.

Back on the upside, the paper and packaging group Mondi was 10.1p stronger at 341.1p after Credit Suisse weighed in, raising its target price for the stock from 380p to 455p because of its improved view of the company's prospects.

"We believe Mondi's near-term earnings recovery should be much stronger than consensus estimates imply, and that longer term [earnings] margins... should average 240 basis points higher than the 2004-08 average," Credit Suisse said, repeating its "outperform" recommendation.